Module 1 of 1 · 60 minutes
Where the cash is trapped and how to release it
By the end of this module you will be able to
- Calculate the cash conversion cycle from the accounts
- Diagnose which stage is consuming cash
- Apply practical improvements at each stage
- Explain the working capital cost of growth
Amara I need cash by the end of the month. Where do I look first?
Nadia At what you are already owed. Not the bank, not the supplier, not your pricing. Almost every business that feels short is owed more than it needs, and nobody has made collecting it their job.
Amara We do chase. Sometimes.
Nadia Sometimes is the problem. Most late payment is not a refusal, it is an absence of a request. Invoices that nobody asks about get paid after the ones somebody rings about, every single time.
Amara Fine. What is next after that?
Nadia When you invoice. Many businesses deliver on the second of the month and invoice at month end, then wait thirty days from there. You just gave away four weeks of cash for nothing.
Amara That is embarrassingly simple.
Nadia It is free and permanent, which is a rare combination. Then look at stock. Specifically, look for what has not moved in a year, and be suspicious of volume discounts.
Amara Why? A discount is a saving.
Nadia A five per cent discount for buying eight months of a product you sell in two is not a saving, it is six months of your cash sitting on a shelf. That cash cannot pay wages, and shelves do not pay interest.
Amara And the other side, paying suppliers. Just pay late?
Nadia Use your terms fully. Do not exceed them. Going beyond agreed terms costs more than it saves: you lose priority when stock is short, you lose settlement discounts, and a small supplier may simply not survive carrying you. That is a relationship you cannot rebuild cheaply.
Amara You said growth makes all of this worse.
Nadia Double your sales and you roughly double your stock and your unpaid invoices, both funded before the new customers pay. The big contract everybody celebrates is often the thing that breaks the business, and the profit on it is irrelevant until the money actually lands.
The written material
The cycle
Cash buys stock. Stock sits. Stock sells and becomes an invoice. The invoice sits. The customer pays and it becomes cash again. The time from paying for stock to being paid for it is the cash conversion cycle, and every day of it is a day you are funding somebody else.
Stock days plus debtor days minus creditor days gives the figure. Creditor days subtract because your suppliers are funding part of the cycle for you, which is the cheapest finance most businesses will ever get.
- Stock days: how long stock sits before it sells
- Debtor days: how long customers take to pay
- Creditor days: how long you take to pay suppliers
- Cycle: stock days plus debtor days minus creditor days
Releasing cash at each stage
Stock is released by ordering less more often, by identifying lines that have not moved in a year, and by resisting the volume discount that buys eight months of a product you sell in two.
Debtors are released by invoicing on the day of delivery rather than at month end, by making the payment terms explicit before the work starts, and above all by making the chasing somebody's named job. Most late payment is not refusal, it is that nobody has asked.
Creditors are managed by using the terms you agreed, fully, and not beyond them.
Why growth costs cash
Doubling sales roughly doubles the stock you must hold and the invoices you are waiting on, and both are funded before any of the new customers pay. A business growing quickly can be more fragile than the same business standing still.
This is why an order that looks like a triumph can be dangerous: a large contract on long payment terms may require more cash up front than the business has, and the profit on it is irrelevant until the money arrives.
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